Unlimited scrollback, the ability to copy and paste using the keyboard, key bindings to clear scrollback, change font size, etc., separate keybindings to scroll the buffer vs. send scrolling commands to the terminal, double-click on parens/etc. selects a range from there to the corresponding other one, and I could probably go on listing more-or-less unmatched _usability_ features for quite a long time. On the other hand, if it's functionality people are referring to then I guess I just don't know what I'm missing because I've never found it lacking in that department either.
As the cultists say, it "just works".
Not in the least since Snow Leopard, as Terminal.app has been perfectly fine (with Terminal Colors SIMBL plugin, and MouseTerm if you really want) and even better in Lion. For utmost configurability you could lean towards iTerm2, which you can tweak to no end (and arguably more than most X terminals).
Platform-specific tools from pb{copy,paste} to tmutil are truly useful and improved at each new release. Tools like brew give you all the package management love you could want, and xorg support is as first class as it could get without OSX being X-based itself.
I guess that if you want to go further than what OSX currently support, then you're looking for getty VTs, tiling window managers or Compiz customizability. As such one should probably not try to shoehorn Linux into OSX and rather use Linux (or some *BSD) directly.
The last thing I remember was that in OS X 10.5 I had to change some locale option to have UTF-8 working properly. But that's it.
Could you give examples where Terminal.app fails?
grep "$search_string" -n -C 3 --color # color bugs out
Because it operates at the object level rather than the files and strings of nix shells, Windows Powershell is more or less "one ring to rule them all."